Why Is Spread Betting Illegal in the US?

Investing is a heavily regulated activity, so it makes perfect sense that the rules and regulations that govern investing in different countries would vary.

A UK company called Cantor Index, for example, engages primarily in providing spread betting services. The same company operating in the United States would be considered illegal.

What is spread betting, you ask? I was curious to find out more myself and learn why this practice was banned in the U.S.

Spread Betting Basics

The core concept of spread betting in the context of investing is actually easy to understand. You are betting on whether the particular investment, group of investments, market index, etc. will rise or fall. You win or lose based on the accuracy of your bet, and the amount you gain or lose is based on where you sell with respect to the starting amount.

To demonstrate this using a simple example, let’s assume you place a bet with the market at 10,000, and you bet that the market will win. You turn out to be right, and the amount of money you stand to make is based on whether you “sell” your bet at 10,500 or 11,000 or some other amount. Your bet is leveraged in the sense that you can win a much larger amount than originally bet, and that your final winnings depend on how “right” you were.

Conversely, if the market tanks, you will lose money, with the amount proportional to the amount the market falls. The danger lies in the same principle of leverage, since you stand to lose many multiples of your original bet amount, and possibly much more than you can cover with your assets.

Advanced investors in the U.S. can probably relate this to the concept of short selling a stock, where leverage against their small investment also creates a big upside potential with an equally big and dangerous downside.

Many spread betting companies, and those who engage in short selling in the U.S., offer stop orders for this very reason—to encourage investors to cut their losses early enough to be able to make good on their obligations to the company.

Legality of Spread Betting

Spread betting with investments is a big growth industry in the U.K. in recent years. I was curious to find out why spread betting was banned in the United States, and turned to my friend Google for some answers.

Unfortunately, there was no clear answer, but many articles like this one seem to suggest that other vehicles like options and futures were equivalents of spread betting in the U.S., and that powerful U.S. lobbies of these exchanges and other interests would fight to keep spread betting out of the country.

Another theory is that governments want to levy taxes on this kind of investing, which can be difficult to do in the form that spread betting is typically practiced online.

A third option stipulates that spread betting is a form of online gambling, and that online gambling is illegal in the U.S. The actual legality of online gambling is the subject of an interesting and ongoing debate and multiple lawsuits, but this is one theory that makes a lot of sense.

Whatever the actual reasons, it’s pretty clear that as a resident of the U.S., you cannot be involved in any kind of spread betting or its related investment vehicles. However, if you live in the U.K. or many other counties where this practice is legal, that’s an entirely different story.

Conclusions

Companies like Cantor are capitalizing on a growing overseas market for spread betting, and there seems to be enough investor demand to make it worth their while. While it’s not something available to U.S. investors, it’s fun to learn about new investing concepts and even why they might not be permitted in certain parts of the world.

As a reminder, never participate in any investment (especially that which can be akin to gambling) if it is illegal where you live, and definitely not before talking to your financial professional.

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